PERHAPS it was the wonderful sunshine, or the fact that everybody is so desperate for good news, but sterling jumped when it was announced that the economy had apparently grown by 0.3 per cent in the first quarter.
I say apparently because these official figures keep getting revised, sometimes drastically; it is therefore silly to get over-excited because one quarterly preliminary figure is a few tenths of one per cent higher than some had feared.
Our obsession with extremely small differences in data that cannot conceivably be precisely measured is one of the many problems of our contemporary debate, and a sign of hubris and scientific folly. As Jonathan Haskel of Imperial College points out, if the UK were to introduce the reforms recently adopted by the US in the way we measure the economy – include spending on creating music and books as output, and count R&D as investment – our GDP would suddenly be one per cent higher, at the stroke of a statistician’s pen.
So what are the current figures telling us? The economy has been roughly flat for the past 18 months. It peaked in the first quarter of 2008 and troughed in the second quarter of 2009. GDP fell 6.3 per cent from its previous height and remains 2.6 per cent below its peak (though the optimists believe much of this gap could eventually be revised away), manufacturing remains 9.8 per cent below peak, construction a shocking 19 per cent, North Sea oil and gas is also down but services are now 0.8 per cent higher. The growth in the past quarter came from a minor recovery of oil and gas, and 0.6 per cent growth in services. All kinds of services are doing better: City-style finance and professional services are up 1.6 per cent over the past year, government services are up 1.2 per cent, retail is higher and so on. In the case of state output, so much for austerity you could certainly say -- unless what we are seeing is a surge in productivity – with the public sector finally producing more output per pound spent.
It is good news that services are slowly recovering, but the other sectors are being crippled by silly rules and policies. The UK is committing manufacturing suicide by embracing extreme green and anti-carbon measures, unlike most of our global competitors. The profitability of the sector is shot to pieces; and there is the small matter of the intensifying Eurozone crisis hitting exports.
Compare the decline in UK factories with what has been happening in the US. The latest figures show that the US manufacturing sector – fuelled on cheap shale gas – grew three times faster (6.2 per cent) than overall US GDP (2.2 per cent) in 2012, with durable goods up four times faster (9.1 per cent), according to an analysis from the American Enterprise Institute. One-third of US GDP growth can be attributed to manufacturing, even though factories make up just 12 per cent of the economy.
What about house-building? As the University of Warwick’s brilliant Nick Crafts writes on p17, UK private sector house building rose from 133,000 units in 1931-2 to 293,000 in 1934-5 after the previous depression. There was huge growth in homeownership, and 85 per cent of new houses sold for under £750 (£45,000 today). The market was deregulated, land could easily be built upon and developers had zero incentive to land bank, benign conditions which were destroyed by the post-1945 planning rules.
So yes, yesterday’s data was good and certainly saved George Osborne’s bacon. But he needs to do much more – we desperately need radical supply-side reforms to kick-start housebuilding and manufacturing.
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